Thursday, March 27, 2008
Since the Fed backstopped risk assets with the announcement of the term securities lending facility the other week, it's been happy days for those hardy souls brave or inertial enough to have been long equities/credit and short govvys. To a degree, it's put up or shut up time today, as the first $75 billion of TSLF lovin' comes through this afternoon.
The degree to which the TSLF has worked its magic can be seen via the fairly impressive SPX rally off the lows, or even by something as prosaic as swap spreads. Observe that the US 10 year swap spread has narrrowed considerably over the past couple of weeks (the white line in the chart below), while European spreads have only recently started to edge lower....and not by much.
So does this mean we should sound the all clkear for risk assets and let the good times roll? Not necessarily. After all, it's easiest to feel comforted when you know that help is on the way, without the knowledge of whether that help will be enough. It's not like the TAF didn't support equities for a period....as did prior Fed funds cuts...and indeed the discount rate cut in August.
Moreover, it's not like all the rottenness has been cleared out. The US data is still appalling, with yesterday's durable goods figure the latest to suggest that recession looms (if it ain't here already.) And what odds that the whole JPM/Bear/Fed menage a trois comes under investigation eventually? Surely there must be some conflict of interest issues in the NY Fed guaranteeing a deal consummated by one of its own board of directors? Isn't that the sort of 19th Century cowboy capitalism that one expects to hear about only in banana (or otherwise dodgy) republics, not involving the Federal Reserve?
Regardless, markets seem content to accentuate the positive this morning, as the DAX appears to be breaking out of its 2008 downtrend on no real discernible news. A hedge fund short squeeze? To a degree. Quarter end window dressing from real money longs? Perhaps. Does it make Macro Man eager to get stuck into equity markets (in either direction)? Not in the least.